Earnings Call, Conference Presentation
Equities, Fed, BoJ, & you
- Jill's team maintains a below-consensus S&P 500 target implying approximately 4% downside, reiterating conviction in significant downside risk despite only 70% of bear market signposts being triggered as of last month, with expectations for heightened volatility through year-end driven by elevated oil prices and geopolitical tensions.
- While the base case targets a 4% market correction, a bear case scenario posits a potential 20% decline, with specific opportunities anticipated in mid-cap and small-cap stocks within an equal-weighted index due to valuations being cheap and under-owned relative to mega caps.
- Aditya forecasts that a 20% equity decline would materially impact the U.S. macroeconomy, whereas a 4% decline would not, and predicts the FOMC will remove its easing bias at the upcoming June meeting with a median dot showing no rate change, though three to six participants may signal future hikes.
- Aditya anticipates FOMC Chair Warsh will frame the labor market with downside risks to preserve rate cut flexibility, emphasize trimmed mean PCE and AI shocks to justify pausing, and announce working groups on balance sheet and communication without immediate conclusions on shrinking the balance sheet.
- Macro forecasts for the current year are expected to reflect slightly weaker growth, higher inflation, and lower unemployment, with out-year forecasts remaining stable, while a dovish Fed stance could be challenged if rate pricing shifts significantly if Chair Warsh sounds more hawkish than market expectations.
- Aditya predicts the June FOMC meeting will proceed without dissents as even the most hawkish participants favor holding rates, with pragmatic participants likely penciling in 50 or 75 basis points of hikes in the dot plot unless hiking begins in December.
- Oliver expects the Bank of Japan to raise its policy rate next week with a nearly 90% market probability and anticipates a second hike in October, where current pricing implies only a 50% chance, while forecasting Japan-style core inflation to return to 3% by early 2027.
- Oliver forecasts the BOJ will maintain a unanimous vote with no shift in its characterization of financial conditions as accommodative, keep the JGB purchase reduction path through March 2027, and set main purchases at approximately 2.1 trillion yen per month starting April 2027.
- Oliver anticipates the Reserve Bank of Australia will pause rates and remain on hold until mid-next year before a cutting cycle begins in August, though he notes a risk of an August hike if Q2 CPI is strong and unemployment fails to surprise on the downside.
- The team warns that short 10-year JGB positions remain vulnerable given the BOJ's hiking path, and anticipates fading investor attention to energy shocks as oil price spikes transition from base cases to tail risks.
- Jill's team views U.S. small caps as sensitive to rising rate expectations and potential debt challenges, while Aditya predicts a Middle East peace deal will be cited by Chair Warsh as a reason for patience, potentially resulting in a hawkish outlook if oil settles between $80 and $90.
- The Bank of America Global Research team plans to initiate a global rates teach-in series covering the Fed, ECB, BOE, BOJ, and RBA starting next week.